God help a stock that misses analysts' earnings estimates -- because odds are no one else will. Take Getty Images, which reported earnings last Thursday after the market closed. Getty (symbol GYI) earned 61 cents per share in the first quarter -- 3 cents less than Wall Street expected, according to Thomson First Call.
Getty also lowered earnings guidance for the second quarter. The stock plunged 14% Friday and another 6% Monday after analysts at Bear Stearns and Piper Jaffray downgraded the stock. It mattered not one bit that earnings were 7 cents a share higher than they were in the same quarter a year ago. The chief culprit for the miss and the lowered guidance: higher marketing spending than anticipated.
William Blair & Co. analyst Troy Mastin, for one, thinks the selling is overdone. "We continue to have confidence in Getty's business model and in the management team," he says. "Getty's business remains strong."
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The stock, which closed Monday slightly above $60, looks cheap. Analysts expect Getty to earn $2.58 per share this year and $3.10 next year. That gives it a price-earnings ratio of 23 on this year's earnings and less than 20 on next year's. Mastin thinks the stock should trade at 25 to 30 earnings.
Here's the kicker: No one thinks Getty Images is a bad business. Analysts, on average, expect earnings to grow at a 22% annualized rate over the next three-to-five years. Mastin thinks earnings will increase at a 25% rate.
The Seattle-based company maintains a gigantic library of photographs and other images, distributing most of them online. Advertising agencies, magazines and newspapers purchase rights to use the images. This is a business where scale matters -- a lot. Ad agencies and other buyers don't want to sort through a half-dozen databases looking for the photo they want to buy. They prefer going to a couple of sources. And Getty is one of the biggest players. It has grown partly by buying up smaller competitors in what was until recently a fragmented business. More than half of Getty's sales are overseas, and that part of its business is growing particularly rapidly.
Success breeds success in this industry. The more ad agencies turn to Getty, the more photographers want their photos posted on its Web site. What's more, making each sale costs Getty little. Each incremental sale drops almost directly to the bottom line.
As for the Getty's earnings miss, consider the "cockroach theory." It holds that, like cockroaches in the kitchen, there's never just one earnings disappointment. But analysts have already sliced Getty's earnings estimates by so much -- for instance, trimming second-quarter forecasts from an average of 68 cents per share to 61 cents -- that they have effectively reduced the prospects of another earnings disappointment. Mastin predicts that Getty will earn 65 cents a share. Who's right matters a lot to traders. So does the fact that the advertising business is cyclical, which means that Getty's earnings will sag when the economy slows. But what matters most to long-term investors is that Getty's business model is sound and that the share price, just now, is quite reasonable.
--Steven Goldberg
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